Why Unicorns Are Struggling

When financial services company Square priced its IPO at $9 a share last November, well under the $15+ price that private investors paid the year before, it was a cold shower of reality for the 6-year-old company. The share price did rise during the IPO, but at the end of the day the firm’s value leveled off to around $4 billion, just two-thirds of the $6 billion Square supposedly had been worth. Until the IPO, Square had been one of more than 130 unicorns: privately owned tech companies valued at $1 billion or more.

The number of unicorns has risen exponentially in recent years, but by the end of last year there were indications, such as Square’s IPO, that the party was winding down. Many unicorns simply were not doing as well as expected. Why not? Some analysts blame unrealistic valuation while others cite excessive spending. Both are true to some extent and much has been written in this arena. But there is another, equally compelling reason why unicorns are dying: failure to innovate when competitors catch up.

Unicorns operate in industries with big, entrenched incumbents, but they’re able to grow quickly by focusing on a good—sometimes big—idea. Square took on credit card companies that charged small business owners huge fees; online file sharing pioneer Dropbox gave non-tech savvy consumers an easy and cheap way to store and share files; and a host of companies provide on-demand goods and services via smartphone apps that were previously hard for consumers to access quickly. But now we’re seeing that in the face of strong competition, some of these very same unicorns are struggling not only to keep up, but to keep innovating beyond their first breakthrough.

One of the most successful unicorns to date is Dropbox, the online file sharing and storage space company founded in 2007. Dropbox made the previously arcane world of online storage accessible to the everyday consumer when they built a simple, user-friendly folder on your desktop, essentially an extension of your computer’s operating system. With this initial brilliant idea to marry consumers and tech, Dropbox became one of the very first unicorns.

Now valued at $10 billion and boasting 400 million users, Dropbox was the poster child for unicorns’ meteoric rise. But today it faces stiff competition from the likes of Apple, Microsoft, Google, and Amazon in an industry characterized by “the race to zero,” where competitors increasingly are providing more for less, thanks to the Cloud and shifting device preference. Consumers are rapidly moving to mobile devices where not only does the “magic folder” metaphor not work but where the operating systems are tightly controlled by the likes of Apple and Google. If your smartphone already comes with a built-in cloud storage option, why spend the time and money on something else? Dropbox should be working on new innovations if it intends to keep up with the big players. Smaller competitor Box already is working on other innovations, including a project management app.

Evernote started with the mission to be your “second brain.” With their beloved note-taking productivity tool, Evernote kept you organized wherever and whatever device you happened to be on. But soon, Google and Apple introduced Google Docs and Apple Notes. Evernote’s response was to diversify, even debuting Evernote Market in 2013 to sell physical goods: printers, backpacks, and notebooks. But the company’s efforts were unfocused, and it’s somewhat risky for a business to stray too far from its core. Decisions need to be rooted in insight and experimentation. Innovation serves an anticipated need, and demand for that innovation is tested by placing smaller bets before placing larger ones rather than simply tossing out products and services and seeing which ones “stick.” Evernote made the classic mistake of thinking more is better. To Evernote’s credit, in February 2016 the company posted a notice on its website saying it would shut down the Market, noting that “[u]ltimately…Evernote is a software company.”

Unicorns that haven’t gone public, like Evernote and Dropbox, have an advantage over those that have, such as Square. They have an opportunity to get their new idea right before moving into the public investment arena. They can build an innovative culture, one that understands innovation is much more than simply getting a good idea to market. That kind of culture constantly anticipates change, identifies opportunities within that change, and finds low-cost ways to test initiatives before going all in. They do this continuously, staying ahead of competitors who are focused on their last innovation. When competition strikes, only those unicorns able to build a forward-looking, on-to-the next-thing culture will be able to evade the trap of their own early success.